Understanding the hard-to-borrow list is crucial for investors engaged in short selling. This inventory record, maintained by brokerages, highlights stocks challenging to borrow for short sale transactions. As part of a broker’s toolkit, the hard-to-borrow list influences the availability and cost of shares for short selling, impacting investors’ strategies and potential profits.
What is a hard-to-borrow list?
A hard-to-borrow list is a dynamic inventory utilized by brokerages, detailing stocks challenging to borrow for short sale transactions. This catalog is pivotal in managing short selling activities, providing real-time information about stocks that aren’t readily available for borrowing.
Understanding the hard-to-borrow list
Short selling relies on traders or investors borrowing shares from brokers to profit from declining stock prices. When a broker has limited shares available, those stocks are categorized on the hard-to-borrow list. This list serves as a warning to account holders that attempting to short sell these stocks might face refusal due to limited availability.
Short supply isn’t the sole reason for a security landing on the hard-to-borrow list. Factors like high volatility can also contribute to a stock’s inclusion on this list. To initiate a short sale, the client must borrow shares from the broker, potentially incurring higher fees and interest for stocks on the hard-to-borrow list due to their limited supply.
Hard-to-borrow list requirements
Brokerage firms update their hard-to-borrow lists daily, reflecting the dynamic nature of stock availability. To execute a short sale, brokers must ensure they can provide or locate the shares for lending. Regulation SHO, implemented in 2005, enforces a “locate” condition, requiring brokers to reasonably believe they can borrow and deliver the shares for short selling, aiming to prevent naked short selling.
Hard-to-borrow list vs. easy-to-borrow list
The hard-to-borrow list contrasts with the easy-to-borrow list, which catalogues securities readily available for short sale transactions. Investors can generally assume that securities absent from the hard-to-borrow list are accessible for short selling. While the hard-to-borrow list is often internal, clients usually have access to the easy-to-borrow list. Securities on the hard-to-borrow list may incur higher fees compared to those on the easy-to-borrow list, impacting the cost of short selling.
Frequently asked questions
How often are hard-to-borrow lists updated?
Brokerage firms update their hard-to-borrow lists daily to reflect the changing availability of stocks for short sale transactions.
What factors contribute to a stock being on the hard-to-borrow list?
Stocks may land on the hard-to-borrow list due to limited availability, high volatility, or other considerations affecting short selling.
Can stocks on the hard-to-borrow list be short-sold?
While not impossible, short selling stocks on the hard-to-borrow list may come with limitations, potentially leading to refusal or higher fees and interest.
Key takeaways
- The hard-to-borrow list informs investors about stocks challenging to borrow for short sale transactions.
- Factors such as limited availability and high volatility contribute to a stock’s inclusion on the hard-to-borrow list.
- Regulation SHO imposes a “locate” condition to prevent naked short selling and ensure shares can be borrowed for short sales.
- Comparison with the easy-to-borrow list reveals insights into the accessibility and cost of short selling particular securities.
View article sources
- Hard-to-borrow stocks I: price dynamics and option valuation – New York University
- In Short Supply: Short-Sellers and Stock Returns – Wharton School of the University of Pennsylvania
- Short Sales – U.S. Securities and Exchange Commission
- Lecture 13: Hard-to-Borrow Securities – New York University
- Stock Loan Fees: What They Are, How They Work, and Examples – SuperMoney
